

Posted Sep 13, 2012 by Donald Quinn
U.S. Federal Reserve Building.
Dan Smith (CC BY-SA 2.5)
This morning the chairman of the American Federal Reserve, Ben Bernanke, announced that the Federal Reserve was embarking on a very ambitious stimulus program that is designed to help right the United States economy by buying mortgage bonds.
The aim of buying these bonds, according to the chairman, is to make the buying of homes more affordable in the short term while continuing to purchase bonds until the economy starts seeing more jobs, there is lower unemployment, and stronger growth in the economy. The Fed also announced that it would be spending $40 Billion per month on this program. The move was highly anticipated as the economic recovery continues to progress at a less than rapid pace. It is also expected that the Fed will continue to follow this aggressive policy for an undisclosed and undetermined amount of time as it attempts to right the ship. Joe LaVorgna, chief economist at Deutsche Bank Advisors, said in a phone interview with CNBC:
We are looking for on-going sustained improvement in the labor market, Bernanke said during a news conference after the Fed announced a series of bold stimulus measures to get the economy moving. There's not a specific number in mind. But what we've seen in the last six months isn't it.
The chairman went on to highlight that the weak job market is one of the top concerns for the agency, and explained that the continuation of the weak performance by the job market is something that is costing the country more than just money, rather is also a remarkable waste of aptitude and abilities which are also affecting the rate and rapidity of the economies comeback.
The weak job market is a concern to every American. High unemployment imposes hardship on millions of people and it entails a tremendous waste of human skills and talents, Bernanke said.
The reaction from the stock market was to respond appropriately with the Dow Jones surging 206.51 points or 1.55%, the NASDAQ jumping by 41.52 points or 1.33%, and the S&P 500 rallying 23.43 points or 1.63%. These are highs that have eclipsed the last several years, with the gains not being this high since 2007.
Cheering the Federal Reserves decision to also extend a plan to keep short term interest rates at historic lows and commenting on the rally at the stock market Ryan Detrick, senior technical strategist at Schaeffer’s Investment Research had this to say:
In addition to QE3, once news broke that Bernanke upped the GDP for 2013 and 2014, that was basically best of both worlds for equities. It’s clear that the global leaders are doing all they can to combat the slow economy…we look forward to a strong year-end rally.
Not all economists are as excited about the announcement with some fearing that the gains by these drastic measures would be modest at best. Here is what Dan Greenhaus, chief global strategist at BTIG LLC, said in a research note:
Another person who was not totally sold on the measures being taken was Richmond Fed President Jeffrey Lacker who has expressed concerns about inflation and was the only vote against the methods. The Fed voted 11-1 to approve the passing of these measures.
The Federal Reserve has been under considerable pressure to act, as the sluggish recovery of the economy is continuing to perpetuate the long dry season in the job market. With less than two months to election date, the issue of joblessness remains one that is front and center with American voters. Unemployment is holding steady at over 8% nationally, while being far higher in other parts of the country. States like Nevada (12%), Rhode Island (10.8%), and California (10.7%) continue to struggle with historically high unemployment.
Meanwhile many Republicans have expressed concerns that driving the interest rates lower, by actions like that taken by the Fed today, will have a negative effect and increase the likelihood of inflation. The Fed, however, is currently more concerned with growing the economy at a rate that will begin to generate jobs and become sustainable again.
The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions, the Open Market Committee said in a statement.
A key concern facing the American people now is the inability of the American House of Representatives, Congress, to reach agreement on and pass a budget. Chairman Bernanke expressed his hope that Congress will eventually be able to reach a budget deal by the end of the year and avert what many economists are calling a “fiscal cliff”, if it fails to do so. The chairman also reminded the new conference that no action by the Fed could help avert disaster unless the Congress actually passes a budget by the end of the year.
The House met today to vote on a stop gap budget that will patch the country over for another six months and avoid a governmental shut down when the current fiscal year expires on September the 30th. This legislation will be the last piece of business the Congress will take before the election and represents a retreat, of sorts by conservatives within congress, who were seeking austerity measures to bring the bludgeoning American deficit under control. The Senate, controlled by Democrats, is likely to pass the spending measure next week.
Fears have continued to mount on both sides of the isle as the American budget deficit rose by an additional $1.16 trillion through August. Economists have been predicting that a lack of action will result in deep cuts to programs and an automatic increase in taxes that will drive America back, and even deeper, into a recession. As such, many economists have breathed a sigh of relief when the stop gap budget was passed by the house today. There are those, however, who are not convinced that the measures taken by the Fed today are good for the country in the long term.
Bill Gross, who runs bond giant Pimco, told CNBC that the new round of easing would take the Fed's balance sheet up to nearly $3.5 trillion if the purchases continue for a year.
That potentially is reflationary, said Bill Gross. We're just to have to see if it works.
With all the financial data flying around the average American is more concerned about the fundamentals like access to jobs, health care, the continuation of Social Security, and a government that has a plan to reduce the national debt by balancing the budget so that the country is not run into bankruptcy. As election season rolls in, the desire to be heard and not get chewed up by the system is going to play heavily on people’s minds.
“Nothing makes me madder than seeing an average, everyday person get chewed up by the system, just because they don’t have connections,” said Frank Jenkins, Social Security Lawyer.
From today’s actions, it seems like; the Fed at least appears to be paying attention.